USD/JPY unable to hold above 50DMA at 113.20 as long-duration US yields remains subdued

• After hawkish Fed Chair Powell remarks, USD/JPY attempted to recover towards 114.00 on Tuesday, but the momentum faded.
• The pair is now back under its 50DMA at 113.20 as long-duration US yields remain subdued.

USD/JPY was choppy on Tuesday, pushing as high as the 113.60s in the immediate aftermath of hawkish remarks from Fed Chair Jerome Powell in his Congressional testimony from prior lows under 112.60, before pulling back towards 113.00 more recently. That means the pair is on course to post on the day losses of 0.3%, with the session lows under 112.60 actually marking seven-week lows at the time.

USD/JPY’s failure to rally back to Monday’s highs close to 114.00 and the 21-day moving average just above it is a sign that, for now, bullish momentum is weak. That suggests the 50DMA 113.20, which was supported as recently as last Friday and this Monday, may continue to cap the price action, or at least act as a magnet to it. Now that prices have dipped below previous monthly lows and to as low as the 112.50s, a push back lower towards the 112.00 level could be on the cards, so long as recent downside momentum in US government bond yields doesn’t reverse.

Yield update

As is normally the case, USD/JPY price action on Tuesday was to a large extent driven by fluctuations in US bond yields and its impact on US/Japan rate differentials. The US yield curve saw notable bull flattening on Tuesday, with the 2-year yield actually up about 2bps on the day to around 0.52%, the 10s down nearly 9bps to 1.44% after printing its lowest level since September. The 30s, meanwhile, was down over 9bps to under 1.80% and printed its lowest since January of this year.

While short-end yields were given a lasting boost by Fed Chair Powell’s hawkish message, the boost to longer-term yields quickly faded. Traders cited concerns about the Fed turning more hawkish at a time when the economic outlook is unusually unclear given uncertainties to do with the Omicron variant as a reason why longer-duration US bonds were able to retain a decent safe-haven bid.

USD/JPY tends to be more sensitive to rate differentials on longer-term bonds, thus, if the 10 and 30-year yields do make important downside breaks, this would weigh heavily on the pair. The risk of further safe-haven bids into long-term US bonds in wake of more bad news on the Covid-19 Omicron front remains elevated and until there is more certainty, USD/JPY may remain a sell on rallies.